CH 5 - Class Notes.word - CHAPTER 5 FINANCIAL POSITION CASH...

CHAPTER 5 FINANCIAL POSITION + CASH FLOWS BALANCE SHEET : Usefulness • aka Statement of Financial Position • The balance sheet provides information • For evaluating the capital structure and • For computing rates of return on invested assets • It is also useful for assessing an enterprise’s • Liquidity = ability to pay current and maturing liabilities • Solvency = ability to pay debt and related interest • Financial Flexibility = ability to respond to unexpected needs and opportunit-ies BALANCE SHEET : Limitations • Many assets and liabilities are stated at historical cost • Information presented is reliable, however • Reporting at current fair value would result in more relevant information • Judgement + estimates are used in determining many of the items reported on the Balance Sheet • Many “soft” numbers (estimates) are included which may be uncertain • The balance sheet does not report items that cannot be recorded objectively (e.g. internally generated goodwill) BALANCE SHEET : Classification • Similar items are grouped together, with sub-total • Items with different characteristics are separated • Individual balance sheet items should be reported: • Separately • Sufficient detail in order to: • Allow users to assess amounts, timing, and uncertainty of future cash flows • Allow users to evaluate liquidity, financial flexibility, profitability, and risk • Helps to calculate important ratios (e.g. current ratio to assess li-quidity) • Considerations for reporting items separately: • Assets that differ in their type or expected function in the central operations (e.g. inventory vs. capital assets) • Liabilities with different implications for the entity’s financial flexibility (e.g. long term debt vs. current debt) • Assets and liabilities with different general liquidity characteristics (e.g. cash vs. receivables)

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• Assets, liabilities, and equities with characteristics that allow for easy measure-ment or valuation ELEMENTS OF THE BALANCE SHEET : • Assets : Probable future economic benefits as a result of past transactions or

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